Big auction houses running hard into their futures

Big auction chains Manheim and ADESA are seeing their traditional business models upended and are working to address dealers’ changing wholesale vehicle buy-sell needs.

Challenging auctions is the quickening drive to all things digital. As digital auction sources proliferate, dealers can buy and sell remotely, never having to set foot in a physical lane.

This evolution is like what’s happening in auto finance and insurance, with fintech disruptors appealing directly to consumers, offering online credit applications, financing and the sale of service contracts, GAP and prepaid maintenance.

Dealers once dominated the sale of those products, but these new channels siphon off that revenue — and relationship with the dealership.

Manheim, a Cox Automotive brand, noted for the first half of 2018 that 43 percent of all vehicles were sold to a digital buyer using one of its digital platforms. Digital offsite sales, transactions happening outside a physical auction location, grew 39 percent over 2017, the company said.

Manheim started its digital channels nearly 20 years ago now, with the 2002 introduction of its Simulcast online bidding tool, and continues today with its recent launch of Manheim Express, a mobile listing and selling tool. This summer, Manheim announced the multi-year completion of a $400 million technology and process initiative to give dealers more digital options for buying and selling cars more efficiently through Manheim channels.

“Adoption of online auctions has been a little slower than what we predicted in 2002 when we launched Simulcast, but we see a steady increase in our OVE online platform,” said Matt Trapp, Manheim’s regional vice president for the Northeast. “As supplies are lower than demand, dealers are looking at other channels and other opportunities to purchase vehicles, but this is not accelerating beyond our expectation.

“We’re hearing from clients they have to look farther afield to find the inventory they need. As auction chains, we help dealers by providing broader search opportunities to fit their needs,” Trapp said.

KAR Auction Services, the parent company of ADESA, is also meeting changing auction need challenges through technology investment. The company recently reported an 11-percent revenue increase for the second quarter of 2018 over the same period of 2017. Chair and chief executive officer Jim Hallett said in a news release that growth is evidence of the firm’s ability to execute on the fundamentals “while making meaningful investments in our future. We continue to advance our strategic priorities, develop new capabilities and pursue opportunities for growth.”

ADESA president John Hammer said that while physical in-lane volume is “experiencing a modest decline,” total auction volume is up. “Collectively, we are bigger than we were last year.”

KAR bought data-analytics company DRIVIN in 2017 to leverage KAR’s expansive data assets to help customers make better-informed buying and selling decisions. Earlier this year it acquired STRATIM, a programmatic fleet management company for KAR’s play in the mobility market.

These companies’ technology investments aside, it seems “market collusion” as much as anything has knocked loose physical auctions’ glory days. Combining to deliver this punch have been flat new-car sales, which drive used-car volumes (eventually); increased dealer preference to retail lease returns and other vehicles they once sent to auction; and, the tightening supply of the type and quality of used-cars dealers want to buy.

Glen Mercer in his 2017 report, Auction of Tomorrow: 2027, produced for the National Auto Auction Association, agreed: “Certainly it is hard to imagine new-car dealers will be sending more of their used-car units to auction in the future. The debate over upstream marketing … is more nuanced: How much further will this go, how much will it hurt auction profits, and how likely is to slow or even reverse when we (inevitably) move into a down market?

“From the growth of virtual auctions to the rise of mobility services such as Uber and Lyft, toward the impending launch of autonomous vehicles, many dramatic changes have already altered the industry landscape or loom just ahead on the horizon,” Mercer wrote.

Auction Management Solutions president Tom Stewart, on the other hand, sees this all as the auction industry “balancing itself.”

“Digital disruption in this space is nothing new,” Stewart said. “SmartAuction, which has been around since 2004, is an example. Everybody freaked out at the time. I remember a senior executive with ATC-Onlane [now OPENLANE] saying years ago that the physical auction would be dead in 10 years, yet here we are 10 years later, and the world is still spinning.”

The mainline auction chains agree.

“People have been saying for years the physical auction is dead,” Trapp said. “Yes, the traditional auction model with cars running down the lane is changing, and auction companies are finding new ways with digital buying and selling tools to service their dealer clients, but there still is a vast need for physical auctions.

“When it comes to models aged five to 10 years, dealers tend to want to touch those cars, and they find it comfortable to do that at the physical auction, with bidders in the lane validating activity on that vehicle. Our data bears that out — cars sell for the highest money at a physical auction,” the Manheim executive said.

He reported that vehicles coming to auction are selling at greater efficiency — roughly 57 percent compared to a historic 50-percent rate. “Of the cars registered at auction, we’re selling more of what is being offered, which tells us there’s strong demand for vehicles out there,” Trapp said.

ADESA has acquired 12 physical auction properties in the last few years. “If we saw a drop in the effectiveness of physical auctions we wouldn’t have done that,” Hammer said.

“When we talk about opportunities and challenges in this industry, these changes make it a lot of fun,” he added, “because it isn’t business as usual, and we must find new ways to service our customers. We play in most of the different auction channels, from upstream to online to mobile trucks that take the auction to dealer locations.

“Dealers go where they can find inventory,” Hammer said. “They’ll try one platform, and if that doesn’t deliver for them, they’ll try another.”

Mercer concluded, “While we understand the argument that in an online world there will be less need for large physical auctions…it seems to us that any shift to auction relocation will be very slow” due to time to dismantle.”

“The industry is balancing itself,” Stewart said. “The physical auctions have one thing digital auctions do not, and that is cars need somewhere to sit. If physical auctions were dying, why would men and women continue to show up at the lanes when they have these digital options?”